Series 7 - Unit 11

Which of the following plans is NOT required to meet the nondiscrimination provisions of ERISA?

Deferred compensation plans. Deferred compensation plans, by design, are nonqualified and not subject to ERISA. Therefore, they may discriminate as to which persons may participate.

Which of the following retirement plans permit individuals to make contributions to the plan, after the plan participant reaches age 70-½, as long as they have earned income?

Roth IRA

Your customer has a Coverdell Education Savings Account for each of four preteen daughters. What is the maximum amount of pretax contributions that he can make to each ESA?

0 Pretax contributions cannot be made to Coverdell ESAs. The customer is allowed to make a $2,000 after-tax contribution annually for each student until their 18th birthday.

Payroll deduction plan

A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.

A retiree is paid an annual amount equal to 30% of the average of his last 3 years' salary. Which of the following retirement plans offers this type of payment?

Defined benefit. A defined benefit retirement plan establishes, in advance, the payout to be received by the retiree.

Which of the following individuals are eligible to participate in a tax-sheltered annuity? I. Maintenance engineer at a state university. II. Student in a public school system. III. Minister. IV. Office clerk at a small corporation.

I and III. Employees of 501(c)(3) and 403(b) organizations (which include charities, religious groups, sports organizations, and school systems) qualify for tax-sheltered annuities (TSAs).

Section 529 prepaid tuition plan

529 prepaid tuition plans are used to lock in higher education costs at current tuition rates. Eligibility for the plans is state specific. Monies distributed from the plan may be used to pay for tuition in a state funded institution in that state or you can use those monies to pay for a portion of an in-state private school or any out of state school. In these instances the amount available for use in tuition payments will be determined by the tuition that an in-state publicly funded college would charge.

Sally is the named beneficiary of her grandmother's IRA. After the death of her grandmother who was 80 years old, what would Sally's options be regarding the IRA?

Take minimum required distributions based on Sally's life expectancy. Before age 80, Sally's grandmother would have already begun mandatory distributions. When someone inherits an IRA for which the initial owner has begun mandatory distributions, payout must continue but is now based on the life expectancy of the new owner.

A nonqualified deferred compensation plan

does not guarantee that the employer will fulfill the obligation Nonqualified deferred compensation plans are agreements between an employer and an employee in which the employee agrees to defer receipt of part of their salary. Nonqualified deferred compensation plans do not require IRS approval and may discriminate (need not be offered to all employees). In fact, they are generally offered only to officers and other high-ranking executives. In the event of a business failure, there is no guarantee that deferred amounts will be paid.

A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where he works. The annuity contract is currently valued at $16,000, and he plans to retire. On what amount will the customer be taxed if he chooses a lump-sum withdrawal?

6,000 Payments into a nonqualified deferred annuity are made with after-tax money; taxes must only be paid on the earnings of $6,000.

The income level of a donor I.may affect contributions into a Coverdell ESA II.will NOT affect contributions into a Coverdell ESA III.may affect contributions into a Section 529 plan IV.will NOT affect contributions into a Section 529 plan

I and IV Contributions into a Coverdell ESA are phased out at high income levels, whereas the income level of a donor has no impact on contributions made into a Section 529 plan.

Which statements are TRUE regarding contribution limits? I.The contribution limit to a Coverdell ESA can be reduced or eliminated for high-income individuals. II.The contribution limit to a Coverdell ESA cannot be reduced or eliminated for high-income individuals. III.The contribution limit to a Section 529 plan can be reduced or eliminated for high-income individuals. IV.The contribution limit to a Section 529 plan cannot be reduced or eliminated for high-income individuals

I and IV The after-tax contribution limit of $2,000 can be reduced or eliminated for high-income taxpayers. However, there are no income limitations placed on individuals opening Section 529 plans.

Which of the following statements CORRECTLY describe a Roth IRA? I. The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is greater. II. The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is less. III. Contributions are tax deductible. IV. Contributions are not tax deductible.

II and IV. The maximum annual contribution to a Roth IRA is 100% of earned income, not to exceed a maximum allowable dollar limit. Contributions are made with after-tax dollars.

A registered representative (RR) is explaining the characteristics of a Coverdell ESA to a customer. Which of the following statements regarding this type of savings account is CORRECT? I. Contributions are tax deductible. II. Contributions are not tax deductible. III. When used for qualified educational expenses, withdrawals are taxable. IV. When used for qualified educational expenses, withdrawals are not taxable.

II and IV. Contributions to a Coverdell Education Saving Account (ESA) are made with after- tax dollars. Distributions used for qualified educational expenses are tax free.

Which of the following investments is the least appropriate for a qualified pension or profit sharing plan?

Municipal bonds When advising qualified plans, it is not a good investment practice to buy tax-free income. The yield on municipal bonds is typically lower than that on other bonds of comparable quality due to the tax-exempt status of their income payments. Any assets in the retirement plan are free of current taxation so the usual municipal security benefit is lost, and the portfolio contains assets that produce less income. A second problem arises because as participants in the plan begin withdrawing assets, the withdrawal is usually 100% taxable, thus turning what is inherently tax free into something taxable. It makes more sense to buy higher yielding taxable income and to shelter the income within the tax-exempt plan trust.

All of the following qualified plans are covered by ERISA guidelines EXCEPT: A) profit-sharing plans. B) public sector plans. C) 401(k) plans. D) private sector plans.

public sector plans. Public sector plans are not covered by ERISA guidelines. Corporate and certain union retirement plans are subject to ERISA guidelines.